In recent years, housing prices have soared across most of the country. But there are still affordable ways to become a homeowner. Lenders offer many innovative, nontraditional loan products that can help you buy a home. Here are a few of the available options:
With an interest-only mortgage, you are only required to pay the interest each month for a fixed period of time -- usually between five and 10 years. The loan then converts to a regular mortgage, typically amortized over 20 to 25 years. (In some cases, you may also be able to pay down some of the principal during the interest-only period.) Because an interest-only mortgage gives you a lower initial mortgage payment, it may enable you to carry the payments on a home that you would otherwise be unable to afford. It can be particularly useful if you are anticipating a rise in your level of income. The downside, however, is that at the end of the initial term you must be prepared to start paying off the loan by making substantially higher mortgage payments or be prepared to sell your home.
Adjustable rate mortgage (ARM)
In the case of an adjustable rate mortgage (ARM), you get a lower initial interest rate than you do with a fixed-rate loan. The interest rate changes periodically, however, in relation to an index and your rates go up or down accordingly. One of the benefits of an ARM is that, because your initial payments are lower, you may be able to qualify for a higher loan amount and afford a more expensive home. While you must assume the risk of possible future rate increases, it can still be a good option, particularly if you plan to sell your home soon anyway.
40 year or 50 year mortgages
Another nontraditional mortgage option that can help you buy a home, is a 40- or 50-year mortgage. Because you repay the loan over 40 or 50 years, as opposed to the more standard 15 to 30 years, your monthly payments are lower. The only drawback is that these mortgages typically carry slightly higher rates and, because you’re making payments over a longer period of time, you will end up paying more interest. Still, they can be a good option if you’re at an early stage in your career. And, should your income rise, you can always refinance to a shorter-term mortgage.
Keep in mind that while these products make it easier to buy a more expensive home, they also carry more risk than a traditional 30-year fixed-rate mortgage. Always “stress test” your mortgage with a worst-case scenario (falling home prices, rising interest rates) to make sure you can afford the home. If you are uncomfortable with whether you can truly afford your housing payments, renting may be a better option for you. In some housing markets with very high prices, renting can be a better deal.
Even in an expensive housing market, chances are there’s a type of mortgage that can help you buy a home. Contact a lender to find out what program may work best for you.